Home equity lines and your credit rating

Real Estate Agent with The Indy Realty Shop

This is from personal experience.  Something hardly anyone brings up or is ever mentioned is the way that home equity lines of credit show up on your credit report.

Even thought the home equity line is secured against real estate, the home equity line still shows up as "unsecured credit".   So how is this bad?  "unsecured credit" is credit card debt.  I have yet to understand why, but mortgage lenders lump equity lines of credit in with credit card debt, and that is exactly how it shows up on your credit report.

I had never used an equity line to fund an investment purchase until a few years ago.  I took an 88k equity line out on one of my homes, thinking this was better then throwing it on lower % credit cards.   A year later I was looking to purchase another investment property.  My credit score had dropped from 725 to about 670, the only thing that had changed was I had the equity line. I noticed it was showing up as "unsecured credit".  I called the mortgage company thinking there was a mistake.  Nope, my "equity line" was considered just as bad as credit card debt on my credit report.

I then immediately refinanced that as a 2nd mortgage, my credit score went back up.

This is something that I never hear brought up, and in fact, I have ever asked some lenders and they don't even know this happens...

Long and short, to keep your credit up, don't use equity lines unless you need to, it's no better then having credit card debt on your credit report.




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Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Craig, very good and timely info. I am in the process of pulling some equity to rehab a rental. My choice was HELOC or 2nd. I think you just helped me make my decision. Thanks
Nov 21, 2006 08:25 AM #1

Hey guys,

 I am a mortgage banker (not a broker) and think I can add some insight into why your score drops with a credit line.

When the credit reporting companies look at someone's credit profile to determine a score, they look at several factors.

How much available credit does the person have, past payment history (on time vs. late), different types of accounts and what is the proportion of balance to high credit on revolving credit accounts.

The last one is the one that affects us in terms of Equity Lines of Credit. Since the line can be maxed and paid down and maxed up again, it is looked at like a credit card or revolving debt. When we max out a credit line, especially right from the inception, to the reporting agencies it looks risky. In other words, someone gave you credit and you maxed it out immediately.

A Home equity Loan is secured and is closed end - meaning it is not revolving and has a definite pay back period. It cannot be run up, only paid back. So taking out the same dollar amount on a  loan would not drop your credit score as it would on a home equity line.

 Overall, the best rule of thumb is as follows:

If you need some cash but not sure how much and plan on taking out some$ and then paying the line down and then taking more when needed, do an equity line. Get a line for $50k and take out 10k and pay back or down and then another 10k and pay back or down. This is fine.

 However, If you know right away that you need X amount of dollars, let's say $50,000 and as soon as you can you are going to max out the credit line to $50,000, I would avoid and do a loan instead.

Hope this helps!


Dec 04, 2006 01:21 AM #2

Could you please tell  me how the equity in my home affect foreclosure against  me. I have more equity

than I owe. PLEASE RSVP       THANKS ,Jean


Feb 16, 2007 03:17 PM #3
I need to know how I can use my Real Estate License other than  selling Real Estate. I need to earn a steady income . My license are inactive at present . I PLAN TO REACTIVATE THEM IN TNE NEAR FUTURE ,however I could use my knowledge and skills in this field. I can't afford to pay the fees that are required to reinstate my license at the present time.I was very sucessful. I was a member of the million dollar club my first year . ANY INFO YOU COULD GIVE ME CONCERNING THIS MATTER WILL BE GREATLY APPRECIATED.                                 THANKS, Jean        I live in Georgia
Feb 16, 2007 03:32 PM #4
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